Austrian banks profit from benign environment but risks are increasing

Presentation of the 36th Financial Stability Report of the OeNB

In the first half of 2018, Austrian banks continued to benefit from a very benign macroeconomic environment, which was characterized by strong loan demand and a release of risk provisions. The growth of loans to households continued to be largely driven by real estate financing. At the global level, conditions remained favorable, but growing uncertainties became palpable. In this environment, the Austrian Financial Market Stability Board (FMSB) addressed a key macroprudential issue by publicly communicating clear benchmarks for sustainable real estate lending standards.

As the economic upswing continued in the second half of 2018 – though at a slower pace – European financial markets operated in a benign economic environment. Political uncertainties were growing, however. In recent months, it was mostly persistent concerns related to Italy’s fiscal stance that affected European financial markets. “However, the associated rise in Italian government bond yields only spilled over to other euro area countries to a very limited extent,” Ewald Nowotny, Governor of the Oesterreichische Nationalbank (OeNB), said while presenting the OeNB’s 36th Financial Stability Report.

Austrian banks’ lending to nonfinancial corporations accelerated, reaching an annual growth rate of 6.2% in September 2018. This pickup was, on the one hand, spurred by a rise in business investment, and, on the other hand, strongly driven by real estate activities, which accounted for almost half of the overall credit expansion. Also, bank loans in many cases substituted other forms of debt financing. In the four quarters leading up to mid-2018, the corporate sector’s total debt financing was one-sixth lower than in the four preceding quarters. Credit growth, therefore, did not lead to an expansion in corporate debt.

The rise in bank loans to households reached 3.6% per annum in September 2018 and was again to a great extent driven by real estate financing. The share of foreign currency loans and variable rate loans in total loans to households continued to decrease but remained high by European standards. Households’ financial investment increased by 22% in the first half of 2018. Austrian households continued to show a strong preference for highly liquid bank deposits, while on balance they sold capital market instruments (bonds, mutual fund shares, listed shares).

As credit quality improved further, Austrian banks increased their net profits to EUR 3.6 billion in the first half of 2018; nearly half of them were generated by their subsidiaries in Central, Eastern and Southeastern Europe (CESEE). “Given that banks’ increased profitability is based on a cyclically induced release of risk provisions, they need to improve their cost efficiency to ensure they remain sustainably profitable also in the face of a potential downturn,” OeNB Vice Governor Andreas Ittner explained. Already upon the publication of the 2018 stress test results, Austrian supervisors called for continued efforts to improve banks’ capital levels, as strong capitalization is an essential prerequisite for financial stability.

In recent years, macroprudential supervision has contributed to reducing systemic risks, inter alia by applying capital buffers. Although the systemic risks associated with the financing of private residential real estate are limited, a few banks have been showing a tendency to loosen their lending standards. In September, the Financial Market Stability Board (FMSB) therefore decided to specify its expectations regarding sustainable real estate lending standards based on the OeNB’s recommendations. Sustainability in lending can best be achieved, according to the FMSB, by requiring borrowers to provide an adequate down payment when taking out a loan (benchmark: 20% of total financing needs) and by ensuring reasonable limits on debt service payments (benchmark: no more than 30% to 40% of household net income). Moreover, loans with maturities of more than 35 years should be granted only in exceptional cases.  

Banks have benefited from the strong economic upswing seen in recent years. As the boom phase is set to give way to a slowdown in growth in the years to come, banks should further strengthen their risk-bearing capacity and ensure that they have enough room for maneuver in the case of a future downturn. In light of the developments described above and with a view to strengthening financial stability, the OeNB recommends that banks

• safeguard sustainable profitability by further enhancing efficiency so they can further increase capitalization levels and invest in information technology;
• follow the FMSB’s expectations regarding sustainable lending standards in real estate financing;
• continue to reduce nonperforming loans, mainly in CESEE, and
• continue to comply with the supervisory minimum standards for foreign currency and repayment vehicle loans as well as the Sustainability Package.
   

The OeNB’s semiannual Financial Stability Report provides analyses of Austrian and international developments with an impact on financial stability and includes studies offering in-depth insights into specific topics related to financial stability.